Expanding the tax net

The drive to identify new taxpayers that the Collectorate of Sales Tax (Enforcement) launched last October is reported to have led to the detection of 18,224 cases which need to be registered as taxpayers under the Sales Tax Act. These include different categories of 14,933 distributors, agents and dealers; 2,681 wholesalers; 23 car dealers; and 3000 retailers. The list of these tax dodgers has been forwarded to the Sales Tax Collector, who is to issue them notices to get reregistered and start filing monthly tax returns.
It indeed is a welcome exercise. Since it is to help the Central Board of Revenue (CBR) expand its tax net a bit wider to include some of the people who make substantial amounts of money without paying any taxes, it may bring a measure of satisfaction to the regular taxpayers.
Nonetheless, the number of new people to be registered under the Sales Tax Act falls far short of the expectations considering that there are as many as 1.2 million registered income tax payers, whereas those who pay sales tax are only 82000 - about seven percent of the income tax payers.
These statistics surely are not reflective of the actual ratio of those who have easily identifiable taxable income (a vast majority of the income tax payers being salaried individuals) and the ones who make money by selling various products. In fact, if one is to take into account the ever-increasing number of shopping plazas in our small as well as big cities, a place like Lahore alone should have more than 80,000 potential sales taxpayers.
It is true that some of the merchandise, such as textiles that comprise the largest single source of our national earnings, is subject to zero-rated tax for justifiable reasons. Yet those selling such products too are required to be registered with the Sales Tax Collectorate.
The existing number of registered sales tax payers plainly shows that the retail sector is grossly under-registered despite a seemingly stringent campaign that the Musharraf government had launched not too long ago to document economic activity in this particular sector. It is to be conceded that this campaign achieved a lot more success than the ones undertaken by the two previous governments. Still, as is obvious from the existing count of registered sales tax payers as well as the new cases identified by the Tax Collectorate, it remains incomprehensive.
The collectorate based its findings on the information collected from the Regional Commissioner of Income Tax, Southern Region; Large Taxpayer Unit; and Pakistan Revenue Automation Limited. These outfits, of course, do not cover a huge number of taxable consumer items. Which, perhaps, explains why the number of new cases that have been identified for registration as taxpayers is not as big as some estimates, based on activity in the consumer market, suggest it is. Understandably, the CBR is reluctant to undertake a fresh field survey in view of the retailers' complaints of harassment at the hands of its field staff. But it must think of less intrusive ways of detecting tax evaders in this important area of economic activity.
While the CBR has decided to extend the scope of its tax collection, it also needs to pay attention to another potential source of revenue generation, ie, property sales in the housing sector, which remain tax-free. Since there is an enormous amount of money to be made on sale/purchase of houses, it is only fair that like any other commercial activity it should bring the government its due share of revenue on house sales in the form of capital gains tax.
All the more so because most of those earning fat profits on property sales are not genuine homeowners but speculators, who are there in the market only to earn profits. The tax should be applicable on sales that do not comply with a set holding period so as to protect genuine sellers and buyers, and to discourage speculators from operating in the field. The issue of tax on property sales though presents a serious difficulty on account of a constitutional hindrance. Legal advice may be sought to overcome this problem.